VA Disability Compensation: Disability Ratings May Not Reflect Veterans'
Economic Losses (Letter Report, 01/07/97, GAO/HEHS-97-9).

Pursuant to a congressional request, GAO provided information that would
enable the subcommittee to assess the need for a comprehensive study of
the economic validity of the Department of Veterans Affairs' (VA)
disability rating schedule, focusing on: (1) the basis for the
disability ratings assigned to conditions in the current schedule; (2)
socioeconomic changes that have occurred since the original version of
the schedule was developed that may have influenced the earning capacity
of disabled veterans; (3) the results of a previous study that examined
the validity of ratings in the schedule; (4) VA's efforts to help ensure
that the ratings do reflect disabled veterans' average impairment in
earning capacity; and (5) the advantage of basing ratings in the
schedule on actual loss in earnings, and approaches that could be used
to estimate this loss.

GAO found that: (1) the disability ratings in VA's current schedule are
still primarily based on physicians' and lawyers' judgments made in 1945
about the effect service-connected conditions had on the average
individual's ability to perform jobs requiring manual or physical labor;
(2) although the ratings in the schedule have not changed substantially
since 1945, dramatic changes have occurred in the labor market and in
society since then; (3) the results of an economic validation of the
schedule conducted in the late 1960s indicated that ratings for many
conditions did not reflect the actual average loss in earnings
associated with them; (4) it is likely that some of the ratings in the
schedule do not reflect the economic loss experienced by veterans today;
(5) the schedule may not equitably distribute compensation funds among
disabled veterans; (6) VA has done little since 1945 to help ensure that
disability ratings correspond to disabled veterans' average loss in
earning capacity; (7) despite the results of the economic validation
study, VA's efforts to maintain the schedule have concentrated on
improving the appropriateness, clarity, and accuracy of the descriptions
of the conditions in the schedule rather than on attempting to ensure
that the schedule's assessments of the economic loss associated with
these conditions are accurate; (8) basing disability ratings at least in
part on actual earnings loss rather than solely on judgments of loss in
functional capacity would help to ensure that veterans are compensated
to an extent commensurate with their economic losses and that
compensation funds are distributed equitably; (9) GAO's work
demonstrates that there are generally accepted and widely used
approaches to statistically estimate the effect of specific
service-connected conditions on veterans' average earnings; (10) these
estimates could be used to set disability ratings in the schedule that
are appropriate in today's socioeconomic environment; and (11) it could
cost between $5 million and $10 million to collect the data that produce
these estimates, a small fraction of the over $11 billion VA paid in
disability compensation to veterans in fiscal year 1995.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-9
     TITLE:  VA Disability Compensation: Disability Ratings May Not 
             Reflect Veterans' Economic Losses
      DATE:  01/07/97
   SUBJECT:  Veterans disability compensation
             Persons with disabilities
             Statistical methods
             Medical economic analysis
             Eligibility determinations
             Income maintenance programs
             Military benefits claims
             Income statistics
IDENTIFIER:  VA Disability Compensation Program
             VA Disability Rating Schedule
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Compensation, Pension,
Insurance and Memorial Affairs, Committee on Veterans' Affairs, House
of Representatives

January 1997

VA DISABILITY COMPENSATION -
DISABILITY RATINGS MAY NOT REFLECT
VETERANS' ECONOMIC LOSSES

GAO/HEHS-97-9

VA's Disability Rating Schedule

(105746)


Abbreviations
=============================================================== ABBREV

  ADA - Americans With Disabilities Act of 1990
  ECVARS - Economic Validation of the Rating Schedule
  VA - Department of Veterans Affairs
  VSO - veterans service organization

Letter
=============================================================== LETTER


B-274058

January 7, 1997

The Honorable Terry Everett
Chairman, Subcommittee on Compensation,
 Pension, Insurance and Memorial Affairs
Committee on Veterans' Affairs
House of Representatives

Dear Mr.  Chairman: 

The Department of Veterans Affairs' (VA) disability program is
required by law to compensate veterans for the average loss in
earning capacity in civilian occupations that results from injuries
or conditions incurred or aggravated during military service.  These
injuries or conditions are referred to as "service-connected"
disabilities.  Veterans with such disabilities are entitled to
monthly cash benefits under this program even if they are working and
regardless of the amount they earn. 

In fiscal year 1995, VA paid about $11.3 billion to approximately 2.2
million veterans who were on VA's disability rolls at that time. 
Over the past 50 years, the number of veterans on the disability
rolls has remained fairly constant.  During this period, the
disability rolls were at their lowest level in fiscal year 1946 with
a total of about 1.9 million veterans and at their highest during
fiscal years 1978 through 1984 with a total of about 2.3 million
veterans each year. 

The amount of compensation veterans with service-connected conditions
receive is based on the "percentage evaluation," commonly called the
disability rating, that VA assigns to these conditions.  VA uses its
"Schedule for Rating Disabilities" to determine which rating to
assign to a veteran's particular condition.  VA is required by law to
readjust the schedule periodically on the basis of "experience."
Since the 1945 version of the schedule was developed, questions have
been raised on a number of occasions about the basis for these
disability ratings and whether they reflect veterans' current loss in
earning capacity. 

This report responds to your request for information that would
enable the Subcommittee to assess the need for a comprehensive study
of the economic validity of VA's rating schedule.  It describes (1)
the basis for the disability ratings assigned to conditions in the
current schedule; (2) socioeconomic changes that have occurred since
the original version of the schedule was developed that may have
influenced the earning capacity of disabled veterans; (3) the results
of a previous study that examined the validity of ratings in the
schedule; (4) VA's efforts to help ensure that the ratings do reflect
disabled veterans' average impairment in earning capacity; and (5)
the advantage of basing ratings in the schedule on actual loss in
earnings, and approaches that could be used to estimate this loss. 

To develop this information, we analyzed legislation and reviewed
documents on the history of the program and had discussions with
current and former VA officials and representatives from veterans
service organizations (VSO) familiar with the program's history.  We
also reviewed the results of the President's Commission on Veterans'
Pensions (known as the Bradley Commission) study and the Economic
Validation of the Rating Schedule (ECVARS).  We discussed the ECVARS
and its results with VA's Office of Inspector General and
Compensation and Pension officials and former VA officials familiar
with this study. 

To identify possible approaches VA could use to evaluate and update
its rating schedule to help ensure that ratings reflect the average
reduction in veterans' earning capacity, we reviewed literature on
research design and methods and reviewed the ECVARS methodology.  We
also obtained the views of Bureau of the Census, Social Security
Administration, and Bureau of Labor Statistics officials, economists,
statisticians, and research methodologists. 

We did our work from April 1995 to December 1996 in accordance with
generally accepted government auditing standards. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The disability ratings in VA's current schedule are still primarily
based on physicians' and lawyers' judgments made in 1945 about the
effect service-connected conditions had on the average individual's
ability to perform jobs requiring manual or physical labor.  During
fiscal year 1995, disabled veterans' basic monthly benefit ranged
from $89 for conditions rated at 10 percent to $1,823 for conditions
rated at 100 percent.  Veterans rated at 100 percent who have special
needs, however, could receive up to a total of $5,212 monthly. 

Although the ratings in the schedule have not changed substantially
since 1945, dramatic changes have occurred in the labor market and in
society since then.  The results of an economic validation of the
schedule conducted in the late 1960s indicated that ratings for many
conditions did not reflect the actual average loss in earnings
associated with them.  Therefore, it is likely that some of the
ratings in the schedule do not reflect the economic loss experienced
by veterans today.  Hence, the schedule may not equitably distribute
compensation funds among disabled veterans. 

VA has done little since 1945 to help ensure that disability ratings
correspond to disabled veterans' average loss in earning capacity. 
Despite the results of the economic validation study, VA's efforts to
maintain the schedule have concentrated on improving the
appropriateness, clarity, and accuracy of the descriptions of the
conditions in the schedule rather than on attempting to ensure that
the schedule's assessments of the economic loss associated with these
conditions are accurate.  For example, some of the criteria have been
revised to describe more accurate measures of disease severity or to
recognize the effects of medical and technological advances on
particular disabilities. 

Basing disability ratings at least in part on actual earnings loss
rather than solely on judgments of loss in functional capacity would
help to ensure that veterans are compensated to an extent
commensurate with their economic losses and that compensation funds
are distributed equitably.  For example, according to the schedule,
loss of the use of a hand has a disability rating of 60 percent for
the nonpredominant hand and 70 percent for the predominant hand
because such a loss is expected to reduce veterans' earning capacity
on average by 60 and 70 percent, respectively.  However, VA's
economic validation study in the late 1960s showed that the reduction
in earning capacity that veterans who had lost the use of a hand
experienced was, on average, closer to 40 percent.  In contrast,
veterans who had a disability rating of 70 percent for pronounced
psychotic conditions were found, on average, to have experienced a
reduction in earnings closer to 80 percent. 

Our work demonstrates that there are generally accepted and widely
used approaches to statistically estimate the effect of specific
service-connected conditions on veterans' average earnings.  These
estimates could be used to set disability ratings in the schedule
that are appropriate in today's socioeconomic environment.  It could
cost between $5 million and $10 million to collect the data that
produce these estimates, a small fraction of the over $11 billion VA
paid in disability compensation to veterans in fiscal year 1995. 


   VA'S DISABILITY COMPENSATION
   PROGRAM
------------------------------------------------------------ Letter :2

The law directs VA to compensate veterans for their service-connected
physical or mental conditions according to a schedule of disability
ratings, which represents the average impairment in earning capacity
that results from these conditions.  The first schedule was developed
in 1919 and has undergone many changes since then.  The Schedule for
Rating Disabilities includes a list of physical and mental conditions
with disability ratings assigned to each.  These ratings are used to
determine the amount of compensation that veterans are entitled to
receive on the basis of their specific conditions. 


      VA'S SCHEDULE FOR RATING
      DISABILITIES
---------------------------------------------------------- Letter :2.1

Federal law (38 U.S.C.  1110 and 1155) requires VA to "adopt and
apply a schedule of ratings of reductions in earning capacity from
specific injuries or combination of injuries" to determine the amount
of compensation disabled veterans are entitled to receive.  The
ratings are to be based, "as far as practicable, upon the average
impairments of earning capacity resulting from such injuries in civil
occupations." The law gives the chief administrator of VA the
discretion to define "average impairments in earning capacity" and
the authority to readjust the schedule to help ensure that disability
ratings reflect VA's experience. 

The War Risk Insurance Act of 1917 called for the creation of the
first rating schedule.  The schedule was developed in 1919 and
provided an early framework for the basic design of the current
compensation and pension programs for disabled veterans.  It
underwent major revisions in 1921, 1925, 1933, and 1945, becoming
more comprehensive with each major revision (see fig.  1).  The last
major revision to the schedule was made in 1945. 

   Figure 1:  History of VA's
   Schedule for Rating
   Disabilities

   (See figure in printed
   edition.)

The Schedule for Rating Disabilities contains medical criteria and
disability ratings.  The medical criteria consist of a list of
diagnoses organized by body system and a number of levels of medical
severity specified for each diagnosis.  The schedule assigns a
percentage evaluation, commonly referred to as a disability rating,
to each level of severity associated with a diagnosis.  The
disability rating conceptually reflects the average impairment in
earning capacity associated with each level of severity.  For
example, VA presumes that the loss of a foot as a result of military
service results in a 40-percent impairment in earning capacity, on
average, among veterans with this injury.  All veterans who lose a
foot as a result of military service, therefore, are entitled to a
40-percent disability rating whether this injury actually reduces
their earning capacity by more than 40 percent or not at all. 
Ratings for individual diagnoses in the schedule range from 10
percent to 100 percent in gradations of 10 (see table 1).\1



                                Table 1
                
                Number of Veterans Receiving Disability
                 Compensation During FY 1995, by Degree
                             of Disability

                                                                Number
                                                                    of
                                                                vetera
Degree of disability (percent)                                      ns
--------------------------------------------------------------  ------
0                                                               18,588
                                                                    \a
10                                                              886,27
                                                                     9
20                                                              365,24
                                                                     1
30                                                              308,37
                                                                     7
40                                                              183,67
                                                                     9
50                                                              108,58
                                                                     3
60                                                              106,79
                                                                     8
70                                                              60,770
80                                                              37,488
90                                                              16,592
100                                                             143,28
                                                                     0
======================================================================
Total                                                           2,235,
                                                                   675
----------------------------------------------------------------------
\a While 0-percent ratings are normally noncompensable, some veterans
may receive special monthly compensation for such things as the loss
of a procreative organ. 

Source:  VA, Annual Report of the Secretary of Veterans
Affairs--Fiscal Year 1995 (Washington, D.C.:  VA, Mar.  1996). 


--------------------
\1 A veteran can also receive a 0-percent noncompensable rating that
may be increased to a compensable rating of 10 percent or more if the
veteran's condition worsens.  A 0-percent rating generally means that
VA has determined that a veteran has a condition that can be
classified as service connected; however, it is not severe enough to
qualify for monetary compensation on the basis of the medical
criteria specified in the schedule.  Some veterans with a 0-percent
rating receive special monthly compensation under the VA disability
program.  On the basis of 1994 data, VA estimated there were about
1.2 million veterans who were rated at 0 percent and were not
receiving disability compensation. 


      DISABILITY COMPENSATION
      AMOUNTS
---------------------------------------------------------- Letter :2.2

The amount of compensation veterans are awarded for their
disabilities is based on (1) the disability rating the schedule
assigns to a veteran's specific condition and (2) the specific
benefit amount the Congress sets for each of these disability rating
levels.  To determine what basic compensation a veteran with a
service-connected condition is due, first the veteran's condition is
medically evaluated to determine its severity.  Then VA compares the
results of the evaluation with the medical criteria in the schedule
to determine what disability rating is warranted given the severity
of the veteran's condition.  The veteran will receive the amount the
Congress has set for that disability rating. 

The Congress has adjusted the benefit amounts for each disability
rating level annually.  In fiscal year 1995, the basic monthly
benefit amount ranged from $89 for conditions assigned a rating of 10
percent to $1,823 for conditions assigned a rating of 100 percent
(see table 2). 

Although the primary purpose of VA's disability compensation program
is compensation for impairment in earning capacity, the program also
provides for additional monthly compensation over and above the
amount based on the schedule, for loss of "physical integrity." Loss
of physical integrity is defined as tissue loss, loss of body parts,
or any disease or injury that makes an individual less functionally
whole.  The law (38 U.S.C.  1114) provides for additional monthly
compensation for such things as the loss of a hand, foot, eye, or
procreative organ. 

VA regulations also allow veterans to receive "extra-schedular"
awards when VA determines that the severity of a veteran's condition
is not adequately captured by the rating the schedule assigns to it. 
Extra-schedular awards allow veterans to receive compensation for a
rating higher than the one specified in the schedule for their
condition.  In a case of unemployability, for example, if the
criteria in the schedule indicate that a veteran's condition warrants
at least a 60-percent disability rating but VA determines that, on
the basis of that veteran's unusual circumstances, he or she is
unable to obtain and sustain gainful employment, VA can raise the
compensation for that veteran to the amount provided for a
100-percent rating. 

VA regulations also allow veterans to be compensated for "social
inadaptability" or "social impairment" to the extent it affects
industrial adaptability.  Social inadaptability contemplates those
abnormalities of conduct, judgment, and emotional reactions that
affect economic adjustment, that is, that impair earning capacity. 



                                Table 2
                
                VA Disability Compensation Rates During
                    FY 1995, by Degree of Disability

                                                                Monthl
Degree of disability (percent)                                  y rate
--------------------------------------------------------------  ------
10                                                                 $89
20                                                                 170
30                                                                 260
40                                                                 371
50                                                                 529
60                                                                 666
70                                                                 841
80                                                                 974
90                                                               1,096
100                                                             $1,823
                                                                    \a
----------------------------------------------------------------------
Note:  Effective December 1, 1995, these rates were increased to the
following:  10 percent--$91; 20 percent--$174; 30 percent--$266; 40
percent--$380; 50 percent--$542; 60 percent--$683; 70 percent--$862;
80 percent--$999; 90 percent--$1,124; and 100 percent--$1,870. 

\a When veterans suffer from conditions that result in additional
needs, such as special assistance in the home, they can receive up to
$5,212 a month in disability compensation, including the basic
benefit. 

Source:  VA, Federal Benefits for Veterans and Dependents, 1995 ed.,
VA Pamphlet 80-95-1 (Washington, D.C.:  VA, 1995). 

In 1995, about 70 percent of the 2.2 million veterans on the rolls
were being compensated for conditions with disability ratings of 30
percent or less for a total of nearly $2.8 billion, or about 25
percent of total benefits paid to veterans that year.  Those rated
100 percent accounted for only 6 percent of those on the disability
rolls that year and received $3.7 billion, or about 32 percent of the
total amount of benefits paid (see table 3). 



                          Table 3
          
           Total Compensation Paid During FY 1995
             to Disabled Veterans, by Degree of
                         Disability

                                                Percentage
Degree of     Number  Percentage                  of total
disability        of      of all         Total      amount
(percent)   veterans    veterans   amount paid        paid
----------  --------  ----------  ------------  ----------
0             18,588         0.8  $ 14,917,200       0.1\a
10           886,279        39.6   950,119,200         8.4
20           365,241        16.3   746,307,600         6.6
30           308,377        13.8  1,068,338,40         9.4
                                             0
40           183,679         8.2   913,666,800         8.1
50           108,583         4.8   762,907,200         6.7
60           106,798         4.8  1,256,940,00        11.1
                                             0
70            60,770         2.7   892,731,600         7.9
80            37,488         1.7   659,898,000         5.8
90            16,592         0.7   330,303,600         2.9
100          143,280         6.4  3,707,430,00        32.8
                                             0
==========================================================
Total       2,235,67     100.0\b  $11,303,559,     100.0\b
                   5                       600
----------------------------------------------------------
\a While 0-percent ratings are normally noncompensable, some veterans
may receive special monthly compensation for such things as the loss
of a procreative organ. 

\b Totals may not add to 100 percent because of rounding. 

Source:  VA, Annual Report of the Secretary of Veterans
Affairs--Fiscal Year 1995 (Washington, D.C.:  VA, Mar.  1996). 


   DISABILITY RATINGS MAY NOT
   REFLECT ECONOMIC LOSS
------------------------------------------------------------ Letter :3

Disability ratings in the current schedule may not reflect the actual
economic loss that disabled veterans, on average, now experience. 
While the law contains no definition of "impairments in earning
capacity," ratings assigned to conditions in the schedule are based
more on judgments of the loss in functional capacity, rather than in
earning capacity, resulting from these conditions.  Advances in
medicine and technology and changes in the economy and public policy
and in the field of rehabilitation since 1945 raise questions about
whether ratings for specific conditions set 50 years ago reflect the
average loss in earning capacity today among veterans with these
conditions.  In addition, studies conducted in the mid-1950s and the
late 1960s concluded that the ratings in the schedule did not
accurately reflect the reduction in earning capacity that disabled
veterans experienced at those times and that the ratings needed to be
updated. 


      IMPAIRMENTS IN EARNING
      CAPACITY NOT DEFINED IN THE
      LAW
---------------------------------------------------------- Letter :3.1

The law gives the Secretary of Veterans Affairs the authority to
determine what is meant by "average impairments in earning capacity"
in civilian occupations.  Although VA's Economic Validation of the
Rating Schedule (ECVARS) in the late 1960s defined reduction in
earning capacity as "the loss or lowering of average income from
wages or employment," VA has not defined in regulations what is meant
by average impairment in earning capacity other than to generally
describe it as an economic or industrial handicap. 

Beginning at least as early as 1923, when assigning a rating to a
condition, VA used the loss in physical or overall functional
capacity resulting from that condition (or some other proxy, such as
the average veteran's ability to compete for employment in the job
market) as an indicator of average impairment in earning capacity. 
According to an official in VA's Office of General Counsel, the
average impairment in earning capacity in civilian occupations means
the impairment of an individual's ability to engage in any type of
work available in the economy. 


      FUNCTIONAL CAPACITY USED AS
      AN INDICATOR OF EARNING
      CAPACITY
---------------------------------------------------------- Letter :3.2

The actual loss in earnings associated with a service-connected
condition has not been considered when determining the degree to
which that condition impairs earning capacity.  Nor has it been
considered when determining the rating that condition should be
assigned in the schedule.  In 1945, when the framework for the
current schedule was developed, the job market was oriented toward
physical labor, and physical capacity was expected to have a major
influence on earning capacity.  At that time, a Disability Policy
Board, consisting of doctors and lawyers, set the disability ratings
for the conditions contained in the schedule.  According to a former
Director of VA's Compensation and Pension Service, VA's Department of
Medicine and Surgery, now the Veterans Health Administration,
provided the Board with a medical monograph--a detailed description
of etiology and manifestations--for each of the conditions included
in the schedule at that time.  The Board used these monographs to
estimate the relative effects different levels of severity of a
condition have on the average veteran's ability to compete for
employment in the job market.  It set disability ratings on this
basis.  Thus, ratings for conditions that limited physical ability,
such as the loss of the use of an arm or leg, were expected to
greatly impair veterans' average earning capacity and were given a
relatively high rating. 

Since 1945, VA has made many revisions to the schedule.  The
revisions have included modifications to medical criteria associated
with the ratings, changes in the maximum convalescence period allowed
before requiring reevaluation of the condition, and addition of more
levels of evaluations or ratings.  The revisions, however, have not
been based on empirical data on the effects certain conditions have
on veterans' earnings. 

According to VA Compensation and Pension officials, the basic
procedure used to determine what disability rating to assign to a
condition has not changed since 1945.  This determination has been
and continues to be based on the judgment of individuals with
knowledge and expertise in this area.  When adjusting ratings for
conditions already in the schedule or assigning ratings to new
conditions added to the schedule, VA's goal has been to maintain the
internal consistency of the schedule over time.  In doing so, VA
tries to ensure that new or adjusted ratings are consistent with the
ratings of analogous conditions and reasonable relative to all other
conditions.  As a result, the ratings in the 1945 schedule have been,
in effect, the benchmark for all the ratings adjusted and added since
then, and VA officials acknowledge that the ratings in the current
schedule are consistent with the ratings developed in 1945. 


      CHANGES IN THE ECONOMY AND
      SOCIETY SINCE 1945 INDICATE
      THAT RATINGS MAY NEED
      UPDATING
---------------------------------------------------------- Letter :3.3

Even if functional capacity accurately approximated disabled
veterans' reduction in earning capacity in 1945, changes have
occurred since then that have implications for how accurately those
ratings reflect disabled veterans' reduction in earning capacity
today.  Numerous technological and medical advances have taken place,
as well as economic changes, that have created more potential for
people to work with some conditions and less potential for people to
work with other conditions.  There have also been changes in the
labor market and social attitudes toward the disabled that may affect
disabled veterans' ability to work. 

Since 1945, medical and technological advances have enabled
individuals with some types of disabilities to obtain and sustain
employment.  Advances in the management of disabilities, like
medication to control mental illness or computer-aided prosthetic
devices that return some functioning to the physically impaired, have
helped reduce the severity of the functional loss caused by both
mental and physical disabilities.  Electronic communications and
assistive technologies, such as synthetic voice systems, standing
wheelchairs, and modified automobiles and vans, have given people
with certain types of disabilities more independence and potential to
work. 

There has also been a shift in the U.S.  economy since 1945 from
predominantly labor and manufacturing to skill- and service-based
jobs.  In the 1960s, earning capacity became more related to a
worker's skills and training than to his or her ability to perform
physical labor.  Advancements in technology, including computers and
automated equipment, following World War II and the Korean Conflict
reduced the need for physical labor.  The goods-producing sector's
share of the economy--mining, construction, and
manufacturing--declined from about 44 percent in 1945 to about 21
percent in 1994.  The service-producing industry's share, on the
other hand--such areas as wholesale and retail trade; transportation
and public utilities; federal, state and local government; and
finance, insurance, and real estate--increased from about 57 percent
in 1945 to about 80 percent in 1994. 

While the shift to a more service-oriented economy may have had a
positive effect on job opportunities for veterans with physical
disabilities, it may have had the opposite effect for those with some
mental impairments.  However, new treatments and medications have
made it possible for individuals with some mental illnesses to
function more fully today.  About 20 percent of the veterans on the
disability rolls as of September 30, 1995, were receiving
compensation for psychiatric and neurological conditions, whereas 80
percent were being compensated for general medical or surgical
conditions, or physical disabilities (see table 4). 



                                Table 4
                
                Distribution of Veterans on the Rolls in
                  FY 1995, by Degree of Disability and
                         Major Medical Category

                                Total
                                number   Psychiatric       General
                                  of         and         medical and
                                vetera   neurological      surgical
Degree of disability (percent)    ns      conditions      conditions
------------------------------  ------  --------------  --------------
                                        Number          Number
                                            of              of
                                        vetera  Percen  vetera  Percen
                                            ns       t      ns       t
------------------------------  ------  ------  ------  ------  ------
0                               18,588      \a      \a  18,588     100
10                              886,27  111,00      13  775,27      87
                                     9       2               7
20                              365,24  23,852       7  341,38      93
                                     1                       9
30                              308,37  70,225      23  238,15      77
                                     7                       2
40                              183,67  27,147      15  156,53      85
                                     9                       2
50                              108,58  39,774      37  68,809      63
                                     3
60                              106,79  19,487      18  87,311      82
                                     8
70                              60,770  22,430      37  38,340      63
80                              37,488  11,061      30  26,427      70
90                              16,592   4,873      29  11,719      71
100                             143,28  97,203      68  46,077      32
                                     0
======================================================================
Total                           2,235,  427,05      19  1,808,      81
                                   675       4             621
----------------------------------------------------------------------
\a Not applicable. 

Source:  VA, Annual Report of the Secretary of Veterans
Affairs--Fiscal Year 1995 (Washington, D.C.:  VA, Mar.  1996). 

In addition, in recent decades there has been a trend toward greater
inclusion of and participation by people with disabilities in the
mainstream of society.  Changes in public attitudes toward people
with disabilities have resulted, over the past 2 decades, in public
policy requiring the removal of environmental and social barriers
that prevent the disabled from fully participating in the workforce
as well as in their communities.  The Americans With Disabilities Act
of 1990 (ADA), which supports the full participation of people with
disabilities in society, fosters the expectation that people with
disabilities can work.  The act prohibits employers from
discriminating against qualified individuals with disabilities and
requires employers to make reasonable work place accommodations for
these individuals. 


   STUDIES HAVE FOUND THAT RATINGS
   NEED UPDATING
------------------------------------------------------------ Letter :4

Two major studies have been conducted since the implementation of the
1945 version of the schedule to determine whether the schedule
constitutes an adequate basis for compensating veterans with
service-connected conditions.  One was conducted by a presidential
commission in the mid-1950s and a second by VA in the late 1960s. 
Both concluded, for various reasons, that at least some disability
ratings in the schedule did not accurately reflect the average
impairment in earning capacity among disabled veterans and needed to
be adjusted. 

The President's Commission on Veterans' Pensions, commonly called the
Bradley Commission, was created in 1955 "to carry out a comprehensive
study of the laws and policies pertaining to pension, compensation,
and related nonmedical benefits" for veterans.  As part of this
study, the Commission examined VA's Schedule for Rating Disabilities. 
To determine whether the schedule at that time constituted an
adequate and equitable basis for compensating disabled veterans, the
Commission examined (1) the medical criteria in the schedule and (2)
the disability ratings associated with these medical criteria. 

On the basis of the results of a survey designed to obtain the views
of medical specialists nationwide, the Commission concluded that the
medical criteria in the schedule did not reflect the advances that
had been made in medicine since 1945.  The Commission also asked 169
physicians whether they believed the ratings fairly represented the
average impairment of earning capacity resulting from the various
degrees of severity of physical impairment.  Forty percent of the 153
physicians who responded believed that the ratings fairly represented
average impairment in earning capacity, 40 percent believed the
ratings did not, and 20 percent did not respond or gave vague
responses.  Many of those who believed the schedule's ratings in
general fairly represented average impairment of earning capacity,
however, believed that the ratings for the lower disability
percentages (usually below 30 percent) did not. 

The Commission's comparison of the earnings and income of disabled
veterans with the earnings and income of nondisabled veterans and
others indicated that, with the exception of totally disabled
veterans and elderly disabled veterans, there was little difference
in combined median annual earned income of these groups.  The
Commission concluded that the amount of disability compensation
seemed to make up for the difference in overall income between the
two groups.  But this compensation was not based on the average
impairment in earnings capacity.  The Commission observed that no
studies had been conducted to measure the actual impairment in
earnings capacity among the disabled, and the standard used to set
disability ratings in the schedule was geared to the impairment of
the individual who performs manual labor.  Thus, because "functional
physical capacity" has a major effect on a laborer's ability to work,
the Committee concluded that physical impairment has been VA's
predominant standard for setting disability ratings. 

In addition to presenting the results of its study, the Commission
pointed out that advances have been made in surgery, prosthetics,
medical treatment, and rehabilitation since the schedule was revised
in 1945 and that these advances could change the extent to which
physical impairment affects earning capacity.  The Commission also
noted that the job market has shifted from predominantly manual labor
jobs to more clerical and service-oriented jobs.  Thus, the
Commission concluded that the rating schedule tended to be less
representative of the average impairment in earning capacity of
veterans who performed nonmanual labor jobs. 

The Commission's overall recommendation with regard to the schedule
was that it should be revised thoroughly on the basis of factual data
to ensure that it reflects veterans' average reduction in earning
capacity, as required by law.  The Commission stated that the basic
purpose of the program is economic maintenance and, therefore, it is
appropriate to compare periodically the average earnings of the
working population and the earnings of disabled veterans, and update
the schedule accordingly to help ensure that veterans are adequately
compensated for the average reduction in earnings they experience as
a result of their service-connected conditions. 

In the late 1960s, VA conducted the ECVARS in response to the Bradley
Commission recommendations and recurring criticisms that ratings in
the schedule were not accurate.  This study was designed to estimate
the average loss in earning capacity among disabled veterans by
calculating the difference between the earnings of disabled veterans,
by condition, and the earnings of nondisabled veterans, controlling
for age, education, and region of residence.\2

The ECVARS is the most comprehensive assessment of the validity of
the ratings ever done.  On the basis of the results, VA concluded
that of the approximately 700 diagnostic codes reviewed, the ratings
for 330 overestimated veterans' average loss in earnings due to their
conditions, and about 75 underestimated the average loss among
veterans.  For example, for the disarticulation of an arm (amputation
through the joint where the shoulder and arm join), VA estimated a
60-percent rating more closely approximated veterans' average
reduction in earning capacity than the 90-percent rating listed in
the schedule.  VA also estimated that a 40-percent rating was more
representative of veterans' average reduction in earning capacity for
the disarticulation of the thigh (with the loss of extrinsic pelvic
girdle muscles) than the 90 percent that was listed in the schedule. 
Some of the ratings that underestimated veterans' reduction in
earning capacity were assigned to mental conditions.  For example, VA
estimated that pronounced neurotic symptoms so severe that they would
impair a veteran's ability to obtain or retain employment would
result in an 80-percent reduction in earning capacity as opposed to
the 70 percent listed in the schedule. 


--------------------
\2 See app.  I for a description of the scope and methodology of the
ECVARS. 


   VA HAS NOT TAKEN ADEQUATE STEPS
   TO HELP ENSURE THAT RATINGS
   REFLECT LOSS IN EARNINGS
------------------------------------------------------------ Letter :5

VA has not systematically reviewed and adjusted the disability
ratings in the schedule to reflect the current average impairment in
earning capacity.  Although the ECVARS found that many of the ratings
in the schedule did not correspond to the actual earnings loss
experienced by veterans, no changes were made to the schedule on the
basis of these findings.  Current revisions VA is making to the
schedule focus on updating medical criteria, not on ensuring that
disability ratings accurately represent the effect that
service-connected conditions have on the average earning capacity of
disabled veterans, and few adjustments are being made to ratings in
conjunction with these revisions.  When making adjustments to the
ratings or adding conditions to the schedule, VA relies on its
experience implementing the schedule and the responses it receives
from the proposed rule-making process to help ensure that ratings are
appropriate. 


      RATINGS WERE NOT CHANGED ON
      THE BASIS OF THE RESULTS OF
      ECVARS
---------------------------------------------------------- Letter :5.1

On the basis of the results of the ECVARS, VA proposed adjustments to
the disability ratings and produced a revised schedule that included
ratings it believed more accurately represented the reduction in
earning capacity that veterans experience as a result of their
service-connected conditions.  However, VA did not adopt this revised
schedule.  According to VA and VSO officials, the schedule was not
adopted because VA believed that the Congress did not support it. 
Since the ECVARS was conducted, VA has not done another comprehensive
study to systematically measure the effect of service-connected
conditions on earnings. 


      CURRENT UPDATE DOES NOT
      ASSESS THE EXTENT TO WHICH
      RATINGS REFLECT ECONOMIC
      LOSS
---------------------------------------------------------- Letter :5.2

In a 1988 report,\3 we reviewed the medical criteria in VA's rating
schedule to determine whether they were sufficiently current to
ensure veterans were being given accurate and uniform percentage
ratings.  We found that VA could not ensure that veterans were given
accurate and uniform ratings because the schedule had not been
adjusted to incorporate recent medical advances at that time.  We
recommended that VA update the medical criteria in the schedule and
keep them current.  In response to these recommendations, VA is in
the process of systematically updating the medical criteria in the
rating schedule.  VA is reviewing each major body system in the
schedule to ensure that the medical criteria for each diagnosis are
up to date.  The objectives of the current update are to make the
criteria for assigning the disability ratings clearer, more
objective, and accurate. 

To date, VA has revised the medical criteria for 8 of the 16 body
systems contained in the schedule.  Revisions generally consist of
such things as (1) wording changes for clarification or reflection of
current medical terminology, (2) addition of alternative criteria,
(3) addition of medical conditions not in the schedule, (4) deletion
of conditions that through advances in treatment are no longer
considered disabling, and (5) reductions in the time period for
reevaluating unstable conditions.\4

Few revisions involved the disability ratings themselves.  Of about
68 diagnostic codes subject to revision in the first 4 body systems
VA reviewed, the ratings for 12 were modified in some way.  Of these
12 modifications, 3 resulted in obvious reductions in ratings, while
none resulted in obvious increases.\5 None of these reductions in
ratings, however, will result in lower ratings for veterans currently
on the disability rolls.  Federal law (38 U.S.C.  1155) specifies
that changes in the rating schedule will, in no event, reduce a
veteran's rating in effect when a change occurs, unless the veteran's
condition has improved. 

When a revision in the medical criteria or the addition of a new
condition to the schedule requires VA to adjust or set ratings for
conditions, these adjustments are generally based on the judgments of
VA's Compensation and Pension staff.  VA's goal is to maintain the
internal consistency of the schedule over time by trying to ensure
that new or adjusted ratings are consistent with the ratings of
analogous conditions and reasonable relative to all others.  For
example, when VA added endometriosis to the schedule, it tried to
find a condition already listed in the schedule that was analogous or
comparable in terms of the physical impairment.  On the basis of the
Veterans Health Administration's medical monograph for this
condition, VA determined that the most severe outcome of having
endometriosis would be a hysterectomy, which was already in the
schedule under another diagnosis and has a disability rating of 50
percent.  VA, therefore, set the maximum evaluation for endometriosis
at 50 percent.  VA then set disability ratings for the less severe
symptoms associated with endometriosis.  In setting the rates for the
less severe symptoms, VA Compensation and Pension personnel told us
that they used their best judgment or experience, or both, to
estimate the amount of time an individual might lose from work as a
result of this condition.  VA set the rating at 30 percent for
moderate symptoms and 10 percent for milder symptoms (see table 5). 



                                Table 5
                
                  Disability Ratings for Endometriosis

                                                                Disabi
                                                                  lity
                                                                rating
                                                                (perce
Symptoms                                                           nt)
--------------------------------------------------------------  ------
Lesions involving bowel or bladder confirmed by laparoscopy,        50
 pelvic pain or heavy bleeding not controlled by treatment,
 and bowel or bladder symptoms
Pelvic pain or heavy or irregular bleeding not controlled by        30
 treatment
Pelvic pain or heavy or irregular bleeding requiring                10
 continuous treatment for control
----------------------------------------------------------------------

--------------------
\3 Need to Update Medical Criteria Used in VA's Disability Rating
Schedule (GAO/HRD-89-28, Dec.  29, 1988). 

\4 See app.  II for examples of the types of changes made as a result
of the current update of the rating schedule. 

\5 See app.  III for a summary of the types of changes made to the
rating schedule as a result of updating 4 of the 16 body systems. 


      VA'S PROCESS FOR SETTING AND
      ADJUSTING RATINGS DOES NOT
      FACTOR IN LOSS IN EARNINGS
---------------------------------------------------------- Letter :5.3

When it proposes changes to the schedule, VA relies on its experience
in implementing the schedule, on feedback from veterans and VSOs, and
on the comments it receives from the public.  According to VA
officials, the feedback they have received from veterans and VSOs
over time about the schedule and VA's experience implementing it
indicate that veterans appear to be generally satisfied with the
ratings in the schedule.  The VSO officials we contacted believe that
VA's disability rating schedule is a well-constructed document that
has withstood the test of time.  They also believe that ratings in
the schedule generally represent the average loss in earning capacity
among disabled veterans. 

Under the proposed rule-making process, proposed changes to the
schedule are published in the Federal Register, and veterans and
others are given the opportunity to comment on these changes before
they are adopted.  According to VA officials, veterans have made
relatively few comments on changes currently proposed, which they
believe suggests that current changes are acceptable. 

Because the schedule appears to be widely accepted, VA officials
believe that the process they use is adequate to ensure that ratings
fairly accurately represent veterans' average impairment in earning
capacity, and therefore there is no need to further assess their
appropriateness. 


   USING DATA ON EARNINGS HAS
   ADVANTAGES IN DETERMINING
   IMPAIRMENT IN EARNING CAPACITY
------------------------------------------------------------ Letter :6

Although VA has chosen not to do so, using an estimate of actual loss
in earnings to approximate loss in earning capacity would help VA
make certain that veterans are compensated to an extent commensurate
with the economic losses attributable to service-connected
conditions.  This would also help to ensure that disability
compensation funds are equitably distributed among disabled veterans
given today's work environment.  Unlike judgments about loss in
functional capacity, estimates of actual loss in earnings are
objective and economic indicators of loss in earning capacity. 

When the 1945 schedule was developed, no study was done to determine
whether ratings based on loss in functional capacity correlated with
disabled veterans' loss in earnings.  Even if ratings did correlate
with loss in earnings at that time, in 1956 the Bradley Commission
found that they did not.  The Commission recognized that the basic
purpose of the program was economic maintenance and that it was
appropriate to compensate disabled veterans on the basis of the
average reduction in earnings they experience as a result of their
service-connected conditions.  It recommended updating the schedule
periodically, primarily by using estimates of the average loss in
earnings experienced by disabled veterans.  The results of the ECVARS
again illustrated that functional loss, even if it had correlated
with economic loss in 1945, did not accurately approximate the
economic loss associated with service-connected conditions in the
late 1960s.  When ratings based on functional capacity were compared
with the estimated loss in earnings experienced by disabled veterans,
they often did not coincide. 

There are several advantages to using empirical data, as opposed to
judgments, to determine impairment in earning capacity.  Estimates of
the loss in earnings resulting from service-connected conditions
based on empirical data are objective and more reliable than
individuals' judgments about the effect these conditions may have. 
Such judgments can vary greatly, as the results of the Bradley
Commission's survey of physicians illustrate.  Half of the physicians
who responded to the survey believed the ratings in the schedule
fairly represented the average loss in earning capacity resulting
from the various degrees of severity of physical impairment.  The
other half disagreed. 

Judgments about the effect certain conditions may have on the ability
to function, work, or earn money do not allow VA to determine whether
the program is compensating disabled veterans to an extent
commensurate with their economic loss.  If VA compared estimates of
loss in earnings, based on empirical data, for specific conditions
with the ratings for these conditions, it could objectively determine
whether the program was achieving this goal and was distributing
disability compensation equitably. 


      IT IS FEASIBLE TO BASE
      ESTIMATES OF IMPAIRMENT IN
      EARNING CAPACITY ON EARNINGS
      LOSS
---------------------------------------------------------- Letter :6.1

The average impairment in earning capacity associated with specific
service-connected conditions can be estimated by calculating the
difference between what veterans with those conditions earn, on
average, and what they would have earned if they did not have those
conditions.  The average loss in earnings associated with specific
service-connected conditions can be determined by using widely
applied research designs for estimating the effect of one variable on
another.  A number of decisions would have to be made, however, with
respect to an overall methodology for a study that would produce
these estimates, and a number of options are related to each.  Each
option has implications for the cost of such a study and the validity
of its results.  Our work suggests that it could cost between $5
million and $10 million to conduct a study like this. 


      WIDELY APPLIED APPROACHES
      CAN BE USED TO QUANTIFY THE
      EFFECT OF SERVICE-CONNECTED
      CONDITIONS ON EARNINGS
---------------------------------------------------------- Letter :6.2

Some generally accepted research designs for estimating the effect of
one variable on another can be used to estimate the average loss in
earnings associated with specific service-connected conditions. 
These designs are widely applied.  While no study that measures the
effect of service-connected conditions on earnings loss will give
absolutely definitive results, many studies have demonstrated that it
is possible to produce acceptable estimates of the impact of one
variable on another.  These designs have been used in policy analyses
to examine the factors affecting the growth of Social Security
Administration disability programs,\6 the role vocational
rehabilitation plays in the tendency of disabled persons to return to
work,\7 and the impact of job training on employment among
ex-offenders.\8

Such designs have also been used in many studies that specifically
measured the impact of such things as military service,\9 functional
impairments,\10 and medical conditions such as epilepsy\11 and
arthritis\12 on wages and earnings.  VA's ECVARS is an example of one
of these.  It relied on a design that is often used in policy
analysis and program evaluation to estimate the effect of
service-connected conditions on the average earnings of veterans on
the VA disability rolls at that time.  Given that other studies have
successfully employed methods for quantifying the effect functional
impairment and specific disabilities have on earnings, these methods
can also be applied to the question of how service-connected
conditions affect disabled veterans' earning capacity. 


--------------------
\6 K.  Rupp and D.  Stapleton, "Determinants of the Growth in the
Social Security Administration's Disability Programs--An Overview,"
Social Security Bulletin, 58:4 (Winter 1995), pp.  43-70. 

\7 J.C.  Hennessey and L.  S.  Muller, "The Effect of Vocational
Rehabilitation and Work Incentives on Helping the Disabled-Worker
Beneficiary Back to Work," Social Security Bulletin, 58:1 (Spring
1995), pp.  15-28. 

\8 M.A.  Finn and K.G.  Willoughby, "Employment Outcomes of
Ex-Offender Job Training Partnership Act (JTPA) Trainees," Evaluation
Review, 20:1 (Feb.  1996), pp.  67-83. 

\9 R.R.  Bryant, V.A.  Samaranayake, and A.  Wilhite, "The Effect of
Military Service on the Subsequent Civilian Wage of the Post-Vietnam
Veteran," The Quarterly Review of Economics and Finance, 33:1 (Spring
1993), pp.  15-31. 

\10 M.L.  Baldwin, L.A.  Zeager, and P.R.  Flacco, "Gender
Differences in Wage Losses From Impairments:  Estimates From the
Survey of Income and Program Participation," The Journal of Human
Resources, 29:3 (Summer 1994), pp.  865-87. 

\11 M.  Famulari, "The Effects of a Disability on Labor Market
Performance:  The Case of Epilepsy," Southern Economic Journal, 58:4
(Apr.  1992), pp.  1072-87. 

\12 T.  Pincus, J.M.  Mitchell, and R.V.  Burkhauser, "Substantial
Work Disability and Earnings Losses in Individuals Less Than Age 65
With Osteoarthritis:  Comparisons With Rheumatoid Arthritis," Journal
of Clinical Epidemiology, 42:5 (1989), pp.  449-57. 


      OPTIONS FOR A DESIGN AND
      METHODOLOGY FOR ESTIMATING
      LOSS IN EARNINGS
---------------------------------------------------------- Letter :6.3

In deciding how to conduct a study to estimate the effect of
disability on earning capacity, questions related to such things as
scope and study design, data collection, and analysis would need to
be addressed.  The feasibility and cost of a study designed to
estimate the effect of service-connected conditions on earnings would
depend on the options chosen relative to each of these.  Following
are some options we identified during our review of the literature
and discussions with experts. 


         STUDY SCOPE
-------------------------------------------------------- Letter :6.3.1

The study's scope--how comprehensive and specific it should be--would
need to be determined.  Decisions about the scope will affect the
overall cost and feasibility of the study and the validity of the
results.  The study could attempt to measure every condition's effect
on earnings at each disability rating level or could select only
certain conditions, depending on (1) the extent to which a condition
is thought to represent or be represented by other conditions in the
schedule or (2) the number of veterans on the rolls with that
condition.  The more conditions examined individually, the more
costly and complicated the study is likely to be.  However, estimates
for individual conditions are more valid if those conditions are
examined individually. 


         STUDY DESIGN
-------------------------------------------------------- Letter :6.3.2

It is possible to quantify the effect of service-connected conditions
on earnings by estimating the difference between the actual earnings
of veterans on the disability rolls and what their earnings would
have been if they did not have their service-connected conditions. 
The actual earnings of disabled veterans can be measured directly. 
If it were possible to control which veterans would incur
service-connected conditions, veterans could be randomly assigned to
groups with or without a disability, and the difference between the
earnings of these two groups would constitute the effect of
disability on earnings.  Since this is not possible, what disabled
veterans would have earned if they were not disabled has to be
approximated. 

The earnings of the disabled prior to the onset of their
disabilities, or the earnings of a group of individuals who were not
disabled, could be used for this approximation.  Given the data
requirements associated with estimating loss in earnings by comparing
the earnings of veterans before and after the onset of disability, it
may be more feasible to estimate this by comparing the earnings of
disabled veterans with those of a comparison group of nondisabled
individuals. 

When using the difference between the earnings of the disabled and
nondisabled to estimate the effect of a service-connected condition
on earnings, the goal would be to use a nondisabled group that is
similar in as many ways as possible to the disabled group.  The more
equivalent the two groups are, the more able we are to assume that
the difference in earnings is the result of the condition and not
some other factor.  Veterans who are not on the disability rolls,
therefore, would seem to be an appropriate comparison group. 
However, veterans not on the disability rolls may differ from
disabled veterans in other characteristics that could explain
earnings differences, including gender, age, and whether the veteran
has been out of the workforce for reasons such as
institutionalization.  Some of these factors could be considered when
selecting the final comparison group for the study or conducting the
statistical analysis of the data (see next section). 


         CONTROLLING FOR OTHER
         VARIABLES THAT AFFECT
         EARNINGS
-------------------------------------------------------- Letter :6.3.3

If the study design chosen compared the earnings of the disabled with
those of the nondisabled, the simple difference between the two would
not necessarily represent the effect of the condition on earnings. 
To isolate the condition's effect on earnings, other variables that
may differ between the disabled and nondisabled group and also
influence earnings would have to be controlled for.  The more
variables influencing earnings that are controlled for
simultaneously, the more valid the estimates of the effect of
service-connected conditions on earnings. 

Which variables to control for is another issue that the study's
methodology would need to address.  Some of the characteristics of
both disabled and nondisabled veterans that are believed to have an
impact on earnings are age, education, gender, race, and region of
residence.  The number of variables controlled for could influence
the cost and complexity of the study. 

Cross-tabulation and multiple regression are two statistical
approaches that can be used to control for the differences in the
characteristics of disabled and nondisabled veterans, other than
disability status, that may account for the difference in earnings. 
Cross-tabulation would involve making comparisons of disabled with
nondisabled veterans within potentially many different subgroups of
the control variables (for example, age, gender, and education). 
Multiple regression allows the analyst to more efficiently analyze a
larger number of variables simultaneously than does a series of
cross-tabulations.  Recent studies have used multiple regression to
estimate the influence of different variables on wages and earnings. 


         DATA SOURCES
-------------------------------------------------------- Letter :6.3.4

Where and how to obtain data on earnings and the characteristics of
veterans that may influence earnings is another decision to be made
when developing an overall approach for this type of study.  Existing
administrative databases, such as Social Security Administration
earnings records and Internal Revenue Service tax records, as well as
data from national surveys, including the Survey of Income and
Program Participation and the Current Population Survey conducted by
the Bureau of the Census, contain information on earnings and, in
some cases, other characteristics of the general population.  These
databases could be used in conjunction with information in VA
administrative files to identify the effect service-connected
conditions have on disabled veterans' earnings.  If data from these
sources do not meet the requirements of this study or it is not
feasible to use these sources, original data need to be collected. 
If this approach is necessary, sampling and data collection
strategies for surveys of veterans on and off the disability rolls
would need to be developed. 


      COST OF ESTIMATING AVERAGE
      IMPAIRMENT IN EARNING
      CAPACITY
---------------------------------------------------------- Letter :6.4

As a result of their experience with similar studies, officials at
the Bureau of the Census estimated that it would cost between $5
million and $10 million to conduct a study to determine the average
impairment in earning capacity resulting from all, or nearly all, the
conditions in the schedule.  The precise cost would depend on the
study's design and methodology. 


   OBSERVATIONS
------------------------------------------------------------ Letter :7

VA's disability rating schedule has served as a basis for
distributing compensation among disabled veterans relative to their
level of impairment in earning capacity since 1945.  The schedule's
ratings do not, however, reflect the many changes that medical and
socioeconomic conditions may have had on veterans' earning capacity
over the last 51 years.  Thus, the ratings may not accurately reflect
the levels of economic loss that veterans currently experience as a
result of their disabilities. 

Estimates of disabled veterans' average loss in earnings attributable
to specific service-connected conditions could be (1) compared with
the ratings for these conditions to determine whether the ratings
correspond to economic loss and (2) used to adjust ratings that do
not reasonably reflect this loss.  There are pros and cons, however,
to developing earnings-based disability ratings. 

It is uncertain what overall effect earnings-based ratings would have
on total program outlays in the short term.  Estimates of loss in
earnings might show that ratings are appropriate and accurately
represent the average loss in the earnings veterans experience.  On
the other hand, they might show that ratings assigned to some
conditions are not appropriate and either overestimate or
underestimate veterans' average loss in earnings.  Even if a
significant number of ratings in the schedule are reduced on the
basis of these estimates, it would not result in any short-term
reduction in program outlays.  Veterans on the rolls are protected by
law from being adversely affected if the disability ratings assigned
to their conditions are reduced.  If estimates indicate that some
ratings should be increased, the Secretary of VA has the discretion
to increase these ratings for veterans on the rolls at that time.  If
the Secretary decides to do so, in the short term, total program
outlays would increase. 

The long-term effect of an earnings-based schedule on total program
outlays is also uncertain.  Depending on (1) the number of ratings
increased and reduced, (2) which rating levels change, (3) how much
the levels change, and (4) the number of people that are affected by
these changes over time, total program outlays might increase,
decrease, or remain about the same over the long term. 

It could cost between $5 million and $10 million to develop estimates
of the average loss in earnings veterans experience as a result of
specific service-connected conditions.  The cost, however, represents
a small fraction of the approximately $11.5 billion in disability
compensation benefits paid to veterans in fiscal year 1995. 

In our opinion, there is a distinct benefit to be derived from
developing these estimates and using them to adjust disability
ratings in the schedule.  We recognize the uncertainty surrounding
the effect that basing ratings on loss in earnings might have on
long-term program outlays.  However, we believe this uncertainty does
not outweigh the benefit of ensuring that disabled veterans receive
appropriate and equitable compensation.  In addition, the cost of
developing these estimates is not substantial relative to the program
benefits paid annually. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :8

VA's disability ratings do not reflect the effect economic, medical,
and other changes since 1945 may have had on disabled veterans'
earning capacity.  Therefore, the Congress may wish to consider
directing VA to determine whether the ratings for conditions in the
schedule correspond to veterans' average loss in earnings due to
these conditions and adjust disability ratings accordingly. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :9

In commenting on a draft of our report, VA said that the "schedule as
it is currently structured represents a consensus among Congress, VA
and the veteran community" and that the "ratings derived from the
schedule generally represent the average loss in earning capacity
among disabled veterans." VA considers total disability to be "a
purely medical determination," and it contends that changing the
basis for the ratings in the schedule would serve no useful purpose. 
In addition, VA believes that "economic factors converge with"
disability ratings primarily when the Congress establishes the amount
of compensation payable for each disability rating level, and the
Congress may adjust these amounts whenever it determines they are not
appropriate. 

VA also expressed concern that basing ratings in the schedule on
average loss in earnings would (1) result in disparate awards based
on such things as rank or education, (2) preclude the use of
extra-schedular evaluations for exceptional disabilities, (3) not
allow for meaningful input from VSOs, and (4) require annual
revisions to the schedule to keep up with changing economic and
vocational conditions. 

Although the schedule may represent a consensus among the program's
key stakeholders, there is no assurance that this consensus produces
ratings for conditions in the schedule that accurately represent the
average impairment in earning capacity currently associated with
these conditions.  Furthermore, while total, or 100 percent,
disability may be a reasonable reference point from which to
establish ratings for partial disability, we do not agree with VA's
contention that disability is or should be solely a medical
determination.  Other programs define disability as loss in the
ability to earn wages or work as a result of an impairment.  An
impairment is defined as a medical diagnosis of a specific
abnormality, such as "paralysis of upper and lower limbs--one
side."\13 Studies have shown that medical conditions are poor
predictors of incapacity to work, that is, disability.\14

We agree with VA that the Congress can adjust the rate--that is, the
amount of compensation--it establishes for each rating level (10
through 100 percent) in the schedule when it believes that these
benefit amounts are not appropriate.  However, the primary
responsibility to ensure that veterans are compensated commensurate
with the average impairment in earning capacity they experience
because of these conditions rests with the VA.  This can be done by
establishing ratings for conditions contained in the schedule that
reflect veterans' average economic losses attributable to these
conditions. 

Basing ratings on estimates of the average earnings loss among
veterans would not necessarily result in disparate treatment of
veterans.  Service-connected conditions that result in a
high-percentage loss in earnings, on average, among veterans with
these conditions would be assigned a rating higher than conditions
that result in a low-percentage loss in earnings.  As with the
current schedule, veterans who have conditions that are assigned the
same disability rating would receive the same basic monthly
compensation regardless of such circumstances as their military rank
or education. 

We believe disability ratings in the schedule should be based
primarily but not solely on estimates of veterans' average loss in
earnings.  Therefore, earnings-based ratings would not preclude
extra-schedular evaluations.  Nor would an earnings-based schedule
prevent VA from obtaining and taking into account comments from VSOs
and others when it revises the schedule just as it does today. 
Finally, the economists we consulted agreed that ratings based on
earnings loss would need to be validated only once every 10 to 20
years to keep pace with changes in the economy and advances in
medicine and technology that might influence the earning capacity of
veterans with service-connected conditions. 

We have modified the report where appropriate in response to VA's
technical comments on the draft report.  The complete text of VA's
comments appears in appendix IV. 


--------------------
\13 World Health Organization, International Classification of
Impairments, Disabilities, and Handicaps (Geneva:  World Health
Organization, 1980). 

\14 For example, see S.O.  Okpaku and others, "Disability
Determinations for Adults With Mental Disorders:  Social Security
Administration vs.  Independent Judgments," American Journal of
Public Health, Vol.  84, No.  11 (Nov.  1994), pp.  1791-95, and H.P. 
Brehm and T.V.  Rush, "Disability Analysis of Longitudinal Health
Data:  Policy Implications for Social Security Disability Insurance,"
Journal of Aging Studies, Vol.  2, No.  4 (1988), pp.  379-99. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Veterans' Affairs; the
Ranking Minority Member, Subcommittee on Compensation, Pension,
Insurance and Memorial Affairs, House Committee on Veterans' Affairs;
other appropriate congressional committees; the Secretary of Veterans
Affairs; and other interested parties.  We will also make copies
available to others on request. 

If you have any questions about this report, please call Clarita
Mrena, Assistant Director, at (202) 512-6812, or Shelia Drake,
Evaluator-in-Charge, at (202) 512-7172.  Other major contributors to
this report are listed in appendix V. 

Sincerely yours,

David P.  Baine
Director, Veterans' Affairs and
 Military Health Care Issues


DESIGN AND METHODOLOGY FOR THE
ECONOMIC VALIDATION OF THE RATING
SCHEDULE
=========================================================== Appendix I

STUDY OBJECTIVES

The Economic Validation of the Rating Schedule (ECVARS) was designed
to provide information that could be used to

  -- estimate the average economic loss attributable to individual
     service-connected disabilities,

  -- recognize trends toward increases or decreases in the rate of
     economic loss that can be expected with the passage of time and
     aging of the veteran population,

  -- recognize and evaluate the basic differences between the
     disability evaluation policy of VA and that of other federal
     agencies for comparable disabilities, and

  -- formulate proposals for the refinement of the schedule on the
     basis of these estimates and evaluations. 

STUDY DESIGN

To determine the average impairment in earning capacity resulting
from specific service-connected conditions on the rating schedule,
the ECVARS calculated the difference between the median earnings of
veterans on the VA disability rolls, grouped by their disability's
diagnosis, and the median earnings of veterans not on the rolls.  The
earnings of nondisabled veterans were used to approximate what the
earnings of disabled veterans would have been if they did not have
their disability. 

SAMPLE DESIGN

To estimate the average loss in earnings experienced by disabled
veterans as a result of their specific service-connected condition,
all disabled veterans on the disability rolls at that time were
stratified into groups by the diagnosis assigned to their disability. 
While all disabled veterans in strata that contained 500 or fewer
veterans were selected for this study, samples of disabled veterans
were drawn from strata that contained more than 500.  Sample sizes
for each stratum ranged from about 200 to about 1,900 veterans. 

In total, 485,000 of the approximately 2 million veterans who were
receiving disability compensation when this study was done were
chosen to participate.  Not included were female veterans on the
disability rolls, veterans with multiple disabilities, and veterans
whose VA disability compensation was based on the 1925 schedule. 

The ECVARS' estimates of the median earnings of nondisabled veterans
were based on the earnings of a sample of noninstitutionalized,
nondisabled veterans selected from lists of individuals in the
general population that the Bureau of the Census was using at that
time to draw samples for its ongoing Current Population Survey.  In
total, approximately 14,000 nondisabled veterans were chosen for this
survey. 

STUDY SCOPE

The ECVARS did not validate all diagnoses on the schedule, nor did it
validate each individually.  Diagnoses that accounted for very small
numbers of veterans on the VA disability rolls at that time were
excluded from the study.  Diagnoses with fewer than 200 veterans and
similar symptoms were combined and validated as a single diagnosis. 
Diagnoses accounting for at least 200 veterans were validated
individually unless they were what VA referred to as "adequately
represented" by another diagnosis or group of diagnoses, in which
case they were not validated.  The ECVARS validated about 400
diagnosis strata, each containing at least one diagnosis from the
schedule. 

SURVEY METHODS

The ECVARS used a mail survey to collect data on earnings from
disabled and nondisabled veterans.  The Bureau of the Census
administered this survey for VA.  Census mailed out a total of
approximately 500,000 questionnaires in February 1968, which asked
the veterans for data on earnings and other characteristics during
the prior year.  Census mailed out two additional follow-up
questionnaires to nonrespondents and conducted telephone and
face-to-face interviews to obtain data from those who did not respond
to the mail questionnaire.  Data collection was completed in the
first quarter of fiscal year 1969. 

METHOD FOR ESTIMATING LOSS IN
EARNINGS

In addition to data on earnings, the ECVARS collected data on the
age, education, and geographic residence of veterans.  The age
variable was split into four categories--under age 30; ages 30 to 49;
ages 50 to 64; and age 65 and over.  Education was classified as less
than a high school graduate, high school graduate, and 1 or more
years above high school graduate.  There were two categories for the
regional variable--the South and all other geographical regions. 

When calculating the difference between the earnings of the disabled
and nondisabled, each diagnosis stratum was paired with a unique
"control" group that contained nondisabled veterans who were
equivalent with respect to age, education, and region of residence to
the disabled veterans in that diagnosis stratum.  By controlling for
the influence of these other variables, the study attempted to
isolate the effect that the service-connected condition alone had on
earnings. 

The ECVARS calculated a separate estimate of loss in earnings for
each rating level associated with a specific diagnosis stratum. 
Study results were presented in terms of disabled veterans' annual
dollar loss in earnings, disabled veterans' median percentage loss in
earnings relative to the median earnings of nondisabled veterans, and
disabled veterans' median loss in earnings relative to the median
earnings of production workers. 


EXAMPLES OF CHANGES MADE TO THE
RATING SCHEDULE DURING THE CURRENT
UPDATE
========================================================== Appendix II

Diagnostic      Old rating      Revised rating
code            schedule        schedule        Type of change  Rationale
--------------  --------------  --------------  --------------  ----------------
7501            Kidney,         Kidney,         Change in       New system of
                abscess of:     abscess of:     criteria        three general
                rate for        rate as                         areas of
                residuals       urinary tract                   dysfunction
                                infection

7505            Kidney,         Kidney,         Change in       Editorial
                tuberculosis    tuberculosis    wording         changes only
                of, active or   of: rate in
                inactive:       accordance
                active -100;    with 4.88b or
                inactive -see   4.89,\a
                4.88b and       whichever is
                4.89\a          appropriate

7619            Ovaries,        Ovary, removal  Change in       To account for
                removal of      of:             convalescent    improved
                both:           for 3 months    period; change  surgical
                with complete   after removal   in heading;     techniques, to
                extirpation     -100;           and change in   make this
                and artificial  thereafter,     evaluation      diagnostic code
                menopause, for  complete        criteria        explicitly
                6 months after  removal of                      applicable to
                excision -      both ovaries -                  the removal of
                100;            30; removal of                  one and two
                thereafter,     one with or                     ovaries, and to
                30; removal of  without                         make removal of
                one with or     partial                         one ovary
                without         removal of the                  noncompensable
                partial         other -0                        because it does
                removal of the  (review for                     not ordinarily
                other -10       entitlement to                  impair earning
                                special                         capacity
                                monthly
                                compensation
                                under 3.350 of
                                this
                                chapter)\a
--------------------------------------------------------------------------------
\a Reference is to 38 C.F.R.  parts 0-17 (1995). 

Source:  VA, Rating Schedule Amendments Training Package, Vol.  II
(Washington, D.C.:  VA, 1995). 


RESULTS OF VA'S CURRENT REVIEW AND
UPDATE OF THE DISABILITY RATING
SCHEDULE--NUMBER AND TYPES OF
DIAGNOSES CHANGED, BY TYPE OF
CHANGE
========================================================= Appendix III



                        Table III.1
          
          Number of Diagnoses Added to and Deleted
             From the Schedule, by Body System

                              Body system
              --------------------------------------------
                          Oral
                             /                  Hemic/
              Genitourin  dent  Gynecologica  lymphati  Al
                     ary    al             l         c   l
------------  ----------  ----  ------------  --------  --
Diagnoses             31    14            17        15  77
 before
 review/
 update
Diagnoses              4     1             0         4   9
 eliminated
Diagnoses             27    13            17        11  68
 remaining
Diagnoses             11     3             2         1  17
 added
Diagnoses             38    16            19        12  85
 after
 review/
 update
----------------------------------------------------------


                                       Table III.2
                         
                          Changes in Medical Criteria--Number of
                          Diagnoses Changed in Each Body System,
                                    by Type of Change

                                                 Body system
                    ---------------------------------------------------------------------
                                         Oral/                         Hemic/         All
                    Genitourinar        dental   Gynecological      lymphatic     (out of
Type of change in   y (out of 27    (out of 13      (out of 17     (out of 11          68
medical criteria      diagnoses)    diagnoses)      diagnoses)     diagnoses)  diagnoses)
------------------  ------------  ------------  --------------  -------------  ----------
Wording change                 6             3              11              5          25
Criteria changed              17             0              10              7          34
Alternative                    2             1               0              2           5
 criteria added
Reduction in                   2             0               3              1           6
 minimum
 convalescence
 period before
 medical
 reevaluation
Increase in                    0             0               0              0           0
 minimum
 convalescence
 period before
 medical
 reevaluation
-----------------------------------------------------------------------------------------


                                       Table III.3
                         
                         Changes in Disability Ratings--Number of
                          Diagnoses Changed in Each Body System,
                                    by Type of Change

                                                 Body system
                    ---------------------------------------------------------------------
                                         Oral/                         Hemic/         All
                    Genitourinar        dental   Gynecological      lymphatic     (out of
Type of change in   y (out of 27    (out of 13      (out of 17     (out of 11          68
rating                diagnoses)    diagnoses)      diagnoses)     diagnoses)  diagnoses)
------------------  ------------  ------------  --------------  -------------  ----------
Reduction in                   1             0               1              1           3
 existing rating
Increase in                    0             0               0              0           0
 existing rating
Addition of new                1             1               0              5           7
 evaluation levels
 or combination of
 evaluation levels
Elimination of                 1             0               1              0           2
 minimum
 percentage
 evaluation
-----------------------------------------------------------------------------------------



(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
VETERANS AFFAIRS
========================================================= Appendix III



(See figure in printed edition.)



(See figure in printed edition.)


GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
=========================================================== Appendix V

GAO CONTACTS

Clarita Mrena, Assistant Director, (202) 512-6812
Shelia Drake, Evaluator-in-Charge, (202) 512-7172

STAFF ACKNOWLEDGMENTS

The following individuals made important contributions to this
report:  Connie D.  Wilson, Senior Evaluator, collected a major
portion of the evidence presented; Timothy J.  Carr, Senior
Economist, reviewed the literature on the relationship between
disability and earnings and provided advice on methodology; Steven
Machlin, Statistician, provided guidance on research design and
statistical methods; and Stefanie Weldon, Attorney, served as legal
advisor. 


*** End of document. ***